The Best Drug Companies Of 2020

Matthew Herper
,
Forbes Staff
I cover science and medicine, and believe this is biology's century.

Usually sales projections ten years out for a very volatile industry are an exercise in proving that Neils Bohr and Yogi Berra were both geniuses: it's very hard to predict anything. Especially the future. But a report from Timothy Anderson at Sanford C. Bernstein doing just that has gotten some significant play already -- Jim Edwards at BNET, Derek Lowe at In The Pipeline and Duff Wilson at the New York Times have beat me to this particular ground. And rightly so -- what Anderson did is very smart.

Everybody knows that large drug companies such as Pfizer, Eli Lilly, and Merck are facing the expiry of patents on their best sellers. At the same time they are having trouble inventing new medicines, and this means that the drug industry's sales may at best tread water -- and could face some steep drops. The point of Anderson's exercise is to see what happens after the immediate patent expirations, like the loss of Lipitor from Pfizer and Zyprexa from Eli Lilly, to see what happens next. And it is truly informative.

In all of Anderson's analyses, Novartis and GlaxoSmithKline fared very well, growing more than their competitors. By contrast, Eli Lilly and AstraZeneca emerged as the worst-in-class companies, losing a third of their revenue. Bristol-Myers Squibb emerges as a bit of a wild card: if it's pipeline of experimental drugs comes through, it could be one companies that grow sales.

It's worth nothing that which companies Anderson thinks will grow are not a perfect match of which ones he is telling investors to buy. He is recommending Pfizer, Merck, and Novartis to his clients. That's presumably because Bristol's future growth is reflected in its valuation.

Anderson actually did three analyses, all of which I'm presenting. The first looks at a base case of just pharmaceutical sales. If no new drugs are approved in the next ten years and current trends continue, which drug companies will do best? Note that in this case, every company is shrinking. The value on the Y axis are decimals of how big the base will be compared to today. GlaxoSmithKline and Novartis will lose less than 10% of their base sales, according to Anderson, while AstraZeneca will lose 40% and Lilly will lose more than half of its base pharmaceutical sales.

The Base Case

But drug companies, even in this innovation-strangled age, do invent new drugs. So the next step is to put those numbers in. When he does this, Anderson gets the graph below.

All Pharmaceutical Sales

Here we see that Glaxo winds up with a nearly 20% increase in sales over the next decade, while Bristol manages 10%, with a big drop as a result of the loss of Plavix patent around 2013 and 2014. What's making Glaxo perform so well? I looked at Anderson's product-by-product financial model for the British drug giant, and didn't see any single drug driving the growth. The most important are Benlysta, the lupus drug made with Human Genome Sciences, and a replacement asthma drug, being developed with Theravance. The Theravance drug only really replaces sales lost as Advair, Glaxo's big brand asthma inhaler, faces competition.

The graph also shows how much Bristol-Myers Squibb's success is based on its drug pipeline -- which is in some ways riskier than depending on existing drugs. (Not entirely, though -- look what happened to Glaxo with Avandia.)